The EU Commission implicates major banks in cartel cases, threatens with devastating fines

Joaquín Almunia, Vice-President of the EC in charge of Competition, gave a press conference on Statement of Objections of the EC to Crédit Agricole, HSBC and JPMorgan for suspected participation in euro interest rate derivatives cartel. (EC Audiovisual Services, 20/05/2014).

Three major international banking firms Crédit Agricole, HSBC and JPMorgan Chase came yesterday again under the watchful eye of the European Commission, for their role in financial sector cartels (interest rates and derivatives denominated in euro). It’s about financial products based on the Euribor (euro interbank offered rate), an interest rate benchmark. This interest rate affects almost all loans concluded in euro. Let’s follow the story from the beginning.

Eight banks accepted the accusations

Last December the European Commission fined 8 other international financial firms a total of € 1 712 468 000 for participating in illegal cartels in markets for financial derivatives. The Commission explains that “Interest rate derivatives (e.g. forward rate agreements, swaps, futures, options) are financial products which are used by banks or companies for managing the risk of interest rate fluctuations. These products are traded worldwide and play a key role in the global economy”.

The value of the derivatives is (derived) based on the level of a benchmark interest rate, such as the London interbank offered rate (LIBOR) – which is used for various currencies including the Japanese yen (JPY) or the Euro Interbank Offered Rate (Eurbor), for the euro. They can affect the interest rate cost of a major investment project or a house mortgage even a loan for a car. In this way they weight on the everyday lives of every consumer all around the world.

Raising interest rates artificially

Four of these eight institutions were caught participating in a cartel relating to interest rate derivatives denominated in the euro currency (Barclays, Deutsche Bank, Société Générale, Royal Bank of Scotland). In this case, Barclays received full immunity for revealing the existence of the cartel and thereby avoided a fine of around € 690 million for its participation in the infringement.

Another six large international banks participated in one or more bilateral cartels relating to interest rate derivatives denominated in Japanese yen (UBS, RBS, Deutsche Bank, JPMorgan, Citigroup and RP Martin). In December 2013 UBS received full immunity for revealing the existence of the yen cartels and in this way avoided a fine of around € 2.5bn for its participation in five of the seven infringements. Citigroup received full immunity for one of the infringements in which it participated, thereby avoiding a fine of around € 55 million.

Affecting all consumers

Such collision between competitors is prohibited by Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 53 of the EEA Agreement. Both decisions were adopted under the Commission’s cartel settlement procedure; the companies’ fines were reduced by 10% for agreeing to settle.

Last December, the EU Commission had also accused the three above mentioned banks (Crédit Agricole, HSBC and JPMorgan Chase) for having participated in these infringements of the anti-trust laws. However, the three didn’t settle with the EU authorities and refused any wrongdoing. Understandably, they thought that they could hide the traces of their questionable transactions which could betray their participation in the cartels, beyond the reach of the Commission services.

It seems that now the EU authorities have dug out evidence for the participation of the three banks in interest rates setting and derivative pricing rigging. The relevant Commission Press lease states that, “Since that time (December 2013), we have continued our investigation under the standard cartel procedure for the three parties that did not settle with the Commission – namely Crédit Agricole, HSBC and JPMorgan Chase”. If the Commission was unable to come up with hard evidence implicating the three banks, Joaquín Almunia, the Commission’ Vice-President in charge of competition policy, would have avoided to send them the ‘Statement of Objections’, thus initiating their indictment.

Fines of up to 10% of turnover

According to the standard legal procedures, after the accused parties have exercised their rights of defense (examine the documents in the Commission’s investigation file, reply in writing and request an oral hearing) and the Commission insists that there is sufficient evidence of an infringement, it can issue a decision prohibiting the unlawful conduct and impose a fine of up to 10% of a company’s annual worldwide turnover.

In the event that those three banks still deny settling their case with the Commission, the fine can reach the maximum. A forfeit of 10% on their worldwide turnover could be devastating for the three financial firms.